A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support 4.6 Do you need trading subsidiaries? The trading subsidiary is an extremely well-established means of separating trading from the main activities of the parent charity. When there are several trading activities carried out by the same organisation, creating separate subsidiary companies can protect important assets and financially sound operations from bearing the losses caused by unprofitable ventures. But they can pose risks of their own if management is lax and the people running the businesses want to escape the charity’s controls. The board and staff of a trading subsidiary in South Wales were given freedom to develop their leisure business with little interference from the trustees of the parent charity. But in time the business became more free than anyone had anticipated. It came to see the charity as simply milking it for rent. Requests for trading information and business planning from the under-performing trading operation were ignored. Its staff even started planning to set up a charity of their own. Negotiations failed and the only practical solution to tame the runaway subsidiary was to close it down and set up new management arrangements at considerable cost to the charity and its reputation. 100
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support What is a trading subsidiary? Subsidiary companies: • A subsidiary company is a private limited company with a shareholding owned entirely by another company (the shares are occasionally owned jointly by a group of companies when they set up collaborative ventures). • As the sole shareholder, the parent company (which is sometimes called the holding company) can exercise full control over a subsidiary through its board, including the appointment and dismissal of the directors. There may be several subsidiaries each undertaking different activities. • Subsidiaries can be set up by charities, by non charitable companies limited by guarantee, by Community Interest Companies and by private companies limited by shares. What are they for? There are two basic reasons for voluntary organisations and charities setting up a trading subsidiary: • when you have to – because your registered charity is not allowed to trade in the way you want (see Section 4.3 for details of the types of trading a charity can carry out without needing a subsidiary company) • when you choose to – because there is an advantage to separating trading activities from the parent organisation or from one another. What is involved: Setting up a trading subsidiary is relatively straightforward and painless. If you feel unsure, check out your proposals with another trading organisation which has taken the same route or run them past a legal advisor. Registration is a simple process which you can manage in-house without the need to pay professionals such as company incorporation businesses or solicitors. • It involves registering a company limited by shares at Companies House. Model articles of association are available to download from the Companies House web site. • The application form requires details of directors (a minimum of two), and the company secretary, the number of shareholders (usually one) and the value of shares (a nominal figure, say £100). What should they be called? • The key principle when naming a trading subsidiary is that the separate identities of the parent charity and the trading subsidiary are made clear, which means that the names should be different to prevent any confusion between the two. 101
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A guide to third sector trading - WCVA

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